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Will start-ups change when the winter passes?
Start-ups that have found their way to profitability are the ones that will survive the winter, while those that have not only have a minuscule chance.
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Shopping time: Customers wait to be served at a food stall in Banyuwangi, East Java, that uses a business platform operated by Warung Pintar, a tech start-up that focuses on business services for micro, small and medium enterprises (MSMEs). (Courtesy of /banyuwangikab.go.id)
T
he year 2023 is less than two months old, but the burst of layoffs in tech companies seems to have reemerged after a short slowdown at the end of 2022. Even household names in the tech industry have released announcements of big layoffs: Alphabet, the parent company of Google, reduced its headcount by 12,000; Microsoft by 10,000; Salesforce by 8,000; and Amazon by 8,000 following 10,000 layoffs in November 2022.
Just recently, Dell cut its employment by 6,650, which makes its total tech layoffs near 100,000 in just five weeks in early 2023, a dramatic spike compared with 159,000 tech layoffs in 2022.
If we trace back to how this massive layoff occurred, we encounter three major factors that intertwined and significantly contributed to the creation of a big blow that hit the tech startups hard, namely the slowing down of the economy, disruption of the flow of investment from venture capital and massive hiring sprees during the pandemic.
According to the latest Global Economic Prospects report issued on Jan. 10, the World Bank predicts that global growth will slow from 2.9 percent in 2022 to 1.7 percent in 2023, citing higher inflation followed by a tighter monetary policy and rising geopolitical tensions as the main contributors.
Meanwhile, the International Monetary Fund in its January 2023 World Economic Outlook estimated that global growth will fall to 2.9 percent in 2023 but rise to 3.1 percent in 2024, driven mostly by rising interest rates and the war in Ukraine.
Inflationary pressures that occurred almost evenly throughout the world, especially in the United States and Europe, forced central banks to dampen it through simultaneous increases in interest rates. The interest rate hike has led to major changes in the global investment landscape. Low-interest funds that have been employed to fund various risky investments through various investment channels and financial instruments, such as speculative stocks, hedge funds, cryptocurrency and also startups through venture capital, have turned around the direction and anchored in safe-haven assets such as hard currency, gold and defensive stocks.
While the value of the US dollar and gold peaked at new record highs, the flow of funds to startups worldwide shrank to a low record. According to CB Insights research, total funding provided by venture capital to start-ups worldwide, including to Indonesia, in 2022 was US$415.1 billion, a decrease of 35 percent compared with $638.6 billion in 2021. In the US, the place with the highest population of start-ups, total venture capital funding also fell by 37 percent from $314.9 billion in 2021 to $198,4 billion in 2022.
